Mourdock Takes on Chrysler and Federal Government

Picture this: You’ve been standing in line for dinner at the Wiley Dining court for more than a half hour because it’s steak night. You finally make it to the front of the line and swipe your card twice. It’s expensive, but it will be worth it—it’s steak, after all.

After waiting another eternity, you’re now three people from getting your mouth-watering steak. Then the cook announces there are only five steaks left. No problem. You’re fourth in line. But then the cook does something unprecedented; something outrageous. Ignoring decades of tried and true cafeteria protocols and traditions, the cook arbitrarily decides that the group of kids still waiting in line outside and wearing IU apparel will get the steaks!

You lost a steak, for which you waited and paid for, to someone who didn’t deserve it. Still in disbelief, you are forced to settle for the day-old meat loaf.

This situation seems absurd, but this is exactly what happened to the State of Indiana as a result of the Chrysler bankruptcy. Only President Obama was the lunch lady and the United Auto Workers (UAW) and Fiat were the IU kids who ate your steak.

In the summer of 2008, the State of Indiana purchased secured debt of Chrysler with a face value of $42.5 million for a sum of $17 million. Invested in this debt were three funds in Indiana, the Major Moves Construction Fund, the Indiana State Police Pension Trust, and the Teachers’ Retirement Fund of Indiana.

Beginning in early 2009, the U.S. Treasury Department began to force Chrysler into a Chapter 11, Section 363 bankruptcy procedure. This would be the largest bankruptcy procedure in the history of the U.S. and more importantly, the details of the procedure would be unprecedented.

The Obama Administration announced that for the first time in American history, secured creditors (i.e. bond holders) would receive less than unsecured creditors (i.e. stockholders). The unsecured creditors, including the three Indiana funds mentioned above, would only receive 29 cents on the dollar while the unsecured creditors, which included the UAW, would receive 71 cents on the dollar.

A majority of Chrysler’s secured debt, nearly $6.3 billion, was held by some of the largest financial institutions in the country, including JP Morgan, Citigroup, Goldman Sachs, and Morgan Stanley. The remaining secured debt was held by private equity funds and pension funds in states like Indiana, California, and Michigan.

The financial institutions mentioned above intended to file objections to the proceedings but were convinced by the U.S. Treasury to accept the 29 cents on the dollar for their investments. One can imagine the executive of these corporations being called to the Whitehouse and told “We gave you $90 billion of TARP funds. We’ve got your back. You’re too big to fail. Give it up.” And indeed they did. They even requested the courts to seal their filings to protect their identities.

The only one left standing in the fight was Indiana State Treasurer Richard Mourdock, the fiduciary responsible for the three Indiana funds.

At 10:00 a.m. on Monday, May 18th, the US Bankruptcy Court for the Southern District of New York notified Mr. Mourdock that he had until 4:00 pm the next day to file objections or claims on behalf of the Indiana funds and provide proof of ownership of those funds.

Indiana filed their objection on Tuesday, May 19th claiming, as Mourdock stated in an interview with the Purdue Review, that Indiana “did not want the sale to go forward because the rights of secured creditors were being walked on.”

The State of Indiana made three legal arguments before the New York bankruptcy court. First, that bankruptcy laws and rules cannot be made up on the fly by the Executive Office, a violation of Article I, Section 8 of the U.S. Constitution which states that “Congress shall have the Power… to establish… uniform Laws on the Subject of Bankruptcies throughout the United States.” Also, it was argued that the pace of the proceedings was a violation of the “due process” clause of the Fifth Amendment.

Secondly, that TARP funds provided to Chrysler were “clearly illegal and against Congress’ intent of the use of TARP funds.” This point is reinforced by U.S. Treasury Secretary Timothy Geithner’s testimony before the House Appropriations Financial Services Subcommittee on May 21st that “We do not believe that TARP, as current legislation, provides a viable solution to this specific challenge, [Using TARP money to stabilize state bond ratings]…. We are restricted to giving to financial institutions.”

Third, Indiana argued there can’t be a sub rosa or “under-the-table” bankruptcy. In a normal bankruptcy, a potential bidder would never be allowed to evaluate the assets up for auction or negotiate the terms of the bankruptcy. Yet this is exactly what the U.S. government did. According to Mourdock, “[The U.S. Government] was doing all of this to put a package together that would be sold at auction. In this auction, it was clear that there would only be one bidder, and that bidder would be the U.S. Government.” To ensure that there would be no other bidders, the U.S. Government required any potential bidders to submit a $600 million non-refundable bid deposit. Big surprise, no one else showed up to bid!

The New York Bankruptcy court declined to hear the case but noted the points of law raised by Indiana “had merit.”

The case was then appealed before the U.S. Second Circuit Court of Appeals, who suggested they lacked jurisdiction but issued a stay on the sale until 4:00 pm on Monday, June 15th. This court later ruled that Indiana had no standing to file a claim but that the funds “raise interesting and unresolved constitutional issues.” Interesting.

Indiana then appealed the case before U.S. Supreme Court Justice Ruth Bader Ginsburg who issued a stay until 7:00pm on Tuesday, June 16th. The Supreme Court then issued an order per curiam removing the stay and allowing the bankruptcy sale to proceed because Indiana failed to meet all of the conditions required to stop the sale. Justice Ginsburg noted, “A denial of stay is not a decision on the merits of the underlying legal issues.” Judicial activism at its finest.

In less than 48 hours following the removal of the stay, the sale of Chrysler took place and all of Chrysler’s assets were auctioned off to—you guessed it—the U.S. federal government, the same entity which set the value of those assets. It is estimated that the Indiana funds lost more than $6 million in the process.

A $400 million stake in Chrysler was immediately sold to Fiat, which would not have been so bad had Fiat been required to pay $400 million for those shares. In fact, Fiat will never have to pay for those shares. Not a penny. “We now have a government whose policy is to support foreign corporations, ”Mourdock noted, ”while Indiana and American pensioners are losing their money and getting ripped off to pay for it. And it is appalling!”

President Barack Obama called anyone who would object to the sale of Chrysler “unpatriotic,” “greedy speculators,” and “unwilling to sacrifice.” We now live in a country where the President believes educators and law enforcement officers are un-patriotic and unwilling to sacrifice. One could also imagine Obama believes they have “acted stupidly.”

The amount of money lost by Indiana pensioners is troublesome, but the circumstances which allowed this to happen are even more disconcerting. The scope and magnitude of the legal consequences of the Chrysler bankruptcy is nearly unimaginable.

The way in which this bankruptcy, the largest and most complex bankruptcy in U.S. history at that point, was handled was unlike anything we have ever seen. Will this set a precedent for large bankruptcies in the future? The answer is most likely, “yes.” In an e-mail to Chrysler executives, the U.S. Treasury Department said that Chrysler was to be the “guinea pig” for what they wanted to do with GM. One could imagine they wish to do this for other sectors of the economy.

Additionally, the term “secured creditors” was completely redefined by the judiciary, which is a branch of government that the Constitution states cannot make laws. Wealth was taken (from teachers and police officers) without the due process guaranteed by the Fifth Amendment. “The speed at which this whole process was rammed through made a mockery of due process of law,” Mourdock rightfully noted.

If rules are made up on the fly, who is going to be willing to invest in the United States? If there is no guarantee that investors will receive what they deserve in bankruptcy proceedings, they will take their money elsewhere. There will be a flight of capital out of the United States by foreign investors and our credit rating will be destroyed.

Make no mistake, the precedent set by the Chrysler bankruptcy proceedings is dangerous, indeed. When President Obama announced the week before he was elected that he was out to “fundamentally transform America,” he meant it. Congress and the Obama administration is determined to transform the U.S. economy (the strongest, most resilient economy in the history of the world) into a model as they see fit. “I think that the administration,” Mourdock said, “is deeply visceral, hostile to the very basic tenets of capitalism that state that some will survive and some will fail.”

Because Justice Ginsburg issued the stay of the sale of Chrysler’s assets, Indiana has 90 days to file an appeal. They did so on September 2nd. They will not argue that they or the other creditors be paid the amount typical in a bankruptcy. As Mourdock has stated, there is no legal way to do that. Rather, they will be arguing the basic points of law that the courts claimed to “have merit” raise “interesting and unresolved constitutional issues.”

Citizens should be thankful that there are still elected officials such as Indiana State Treasurer Richard Mourdock who are willing to stand up for the Constitution and citizens’ rights.